Simon Acton, Jennie Holloway and Simon Stewart, cofounders of The Growth Stage
Large, growth companies that once would have floated on leading stock exchanges are staying private for much longer than ever before: think Uber, Airbnb, Palantir, Stripe, Lyft, Pinterest.
At the same time, buyouts have removed large numbers of long-established names from the public lists. In the US, the number of companies publicly traded on major stock exchanges has halved in the past 20 years. In the UK the number is down by one third.
That creates a challenge for the managers investing our pension funds: how to gain exposure to companies well past the start-up stage that promise growth.
On October 15, Simon Stewart, Simon Acton and Jennie Holloway – all three veterans of different investment banks – unveiled one possible solution.
They are co-founders of The Growth Company, a new membership platform where growth stage companies that are seeking substantial institutional capital in order to scale up can present themselves directly to pension funds, sovereign wealth funds, hedge funds, family offices and retail funds.
The platform is free for companies and investors to join. So keen are these kinds of institutions to gain exposure to growth companies that at launch The Growth Stage had already signed up investors with $4 trillion of funds under management, of which roughly 5% is earmarked for private companies.
So, that’s $200 billion of capital for growth companies to pitch for without having to go public and submit to all the associated regulations including quarterly reporting or without selling their souls to private equity funds or venture capitalists who will then drive their businesses towards eventual exits that suit the funds’ timing and format preferences rather than company founders’.
And most important of all, it makes fund raising much cheaper than it is from more traditional sources. The Growth Company charges 1% of funds raised through the platform. A growth company using an investment bank to raise capital from specialist VC or PE funds might end up paying 8% or even higher. The VCs or PE fund of course would make charge a big fee to manage the money of end institutional investors. This platform cuts out two sets of middlemen, each charging a lot for, well, it’s debatebale how much value.
| Simon Stewart |
Stewart tells Euromoney that personal experience – as both head of equity sales at UBS in Europe and as an entrepreneur setting up his own company, Lexikin, a platform for individuals to securely record their assets, wishes, memories and legacies, in case of fire, theft or death – revealed the market opportunity.
“I was meeting all these entrepreneurs around Shoreditch and Borough on the fringe of the City who, when they heard what my day job was, would say: ‘oh, we’re looking to raise $20 million or $100 million, please can you introduce us to your clients?’ I would think, ‘well, that’s never going to happen but I’ll mention it’. And then when I did speak to large institutions I was surprised when they replied; ‘yes, actually, we are looking to do much more with those kinds of private companies but they’re hard for us to reach.”
Stewart continues: “What I saw was that some of these larger capital raises really would benefit from global reach that the smaller advisers to growth companies don’t have. But the big investment banks capable of delivering that global reach demand very high fees for doing smaller deals.”
Stewart spoke to an initial group of ten large institutional investors who said they would be happy to support such a platform and then began approaching entrepreneurs. At launch, the platform had 30 companies in the pipeline and on the first day after announcement another dozen approached it.
“You find that serial entrepreneurs don’t really need the input or the constraints that come with venture capital funds but It can be hard for them to reach long-term institutional investors,” Stewart tells Euromoney. “And what’s more, growth stage funding can be very expensive, with standard fees from 8% up to as high as 15%.”
The Growth Stage operates with a traffic light system. When a company asks to join, it is subject to initial due diligence by Acuris Risk Intelligence, one of ten professional advisory firms that pay to be part of the platform to get close to an attractive group of potential clients.
At this stage the company will have a red light against its name. It has registered but is not seeking funding right now. Investors on the platform can view its pitch deck and teaser video introducing the business and its management team.
Stewart says: “With Mifid II, there is now much less information and research coming to institutional investors from traditional sources. This platform gives investors exclusive insight into growth industries and specific companies.”
If a company decides it needs to raise a series B funding round of say $25 million, an amber light may show against its name. It will now be subject to additional in-depth due diligence from Acuris. Its reports will sit in the Merrill Corporation Data Site, where institutions and lawyers may dip into deal documentation once a company moves ahead into fund raising, when a green light will show against its name.
Merrill Corporation is another professional advisory firm on the platform, along with auditors and consultants EY, payroll and accounting firm Sage, lawyers Travers Smith, and others that are expert in marketing, payments, office space, insurance. “Entrepreneurs are offered so much advice, but their needs change particularly when they seek capital to expand and maybe grow internationally. That’s when they suddenly need larger, best of breed advisers,” Stewart says. “For our platform, the revenue from these advisers means we can concentrate on the quality of companies coming through to seek funding rather than chase numbers.”
| Debbie O’Hanlon |
Debbie O’Hanlon, regional markets Leader at EY, says: “The Growth Stage has built a meeting place for entrepreneurs, investors and advisers that is set to become the launch pad for some of the world’s biggest brands. EY is committed to working with entrepreneurial and fast-growth companies and this helps ensure that we are working with more of tomorrow’s global leaders.”
The hope is within one year to have 100 companies or so on the platform but with only a small handful at any one time with a green light against their name and actively raising equity, debt or alternative financing. The vision is that once they have successful raised funding, these companies stay on the platform but go back to a red light and remain until their next fund raising.
Stewart points to another potential attraction for institutional investors. It can be a place to sell secondary shares. “As well as being a platform to meet new growth companies seeking funding, this can also be a place where institutions encourage companies already in their network, in which they have may have already invested up to their allowed maximum, to go and raise further capital if the institutions do not think them ready to list or appropriate for private equity.”
The platform is authorized and regulated by the UK’s Financial Conduct Authority (FCA) but half its professional advisory firms are not from the UK and the investors who have joined are a mix of mainly US and UK based institutions. Companies are approaching from all over the world, including the West Coast of the US. The hope is to do the first fund raising deals by the end of this year.
The founders are people who like to see deals done. Jennie Holloway started Goldman Sachs’ European equity private placement business and was a founding member of its alternative capital raising team. Simon Acton ran long-only money at Cazenove, spent time as a bank prop trader and ran long-short European equities for a hedge fund.
Just to be clear how disruptive this capital raising platform is, Euromoney asks which kinds of advisers and investors are not on it. “There are no venture capital firms or private equity funds on this platform,” says Stewart, “and there are no investment banks.”
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